One of the key elements that determines whether IR35 applies to a contract is ‘control’—whether or not a client exerts control over a worker in a way that demonstrates that a client-employee relationship exists.
This article explores the importance of control in IR35 and how it can impact both workers and clients.
What is control and direction in IR35?
Control is one of the three key factors HMRC uses to determine a worker’s employment status for IR35 purposes.
The other two factors are “mutuality of obligation” (whether the client is obligated to offer work and the worker is obligated to accept it) and “substitution” (whether the worker can send a substitute to perform the work instead of themselves).
Control refers to the degree of influence a client has over how, when, and where a contractor performs their work.
The level of control a client exercises over a worker is crucial in determining whether that worker is inside or outside of IR35.
How does HMRC view ‘control and direction’
HMRC discusses its approach to control and other IR35 factors in its Employment Status Manuals.
Unsurprisingly, working out whether control applies or not is nuances, and not black and white.
As HMRC states:
The right of control may be explicitly set out in the contract or merely implied.
The important question is whether the hirer could ultimately decide how the work is done if they wanted to.
HMRC also considers the absence of control over ‘how’ work is done doesn’t necessarily mean that a contract falls outside IR35, particularly when it comes to hiring experts in their field.
You can read three examples of how HMRC interprets control here.
Control – things to avoid in a contract
It is important to demonstrate that a client does not influence how the contractor performs his services.
Here are some things that should not appear in either the lower-tier or upper-tier contracts for services.
- The contract specifies that the contractor will be supervised by a line manager or similar company employee.
- The contract specifies start and end times for the contractor’s work, as well as break times.
- The contract includes provisions for holidays or sickness, which may be indicative of an employment relationship.
- Any clauses in the contract that specify the client’s right to control or supervise the contractor’s work.
Such provisions suggest that the contractor may not have the degree of autonomy and control over their work that would typically be associated with self-employment.
As a result, control and direction could well be seen to exist, and the contract could be inside IR35.
Steps to prove that you are not under the control and direction of your client
Review your contract
Review your contract to ensure that it accurately reflects the nature of your working relationship. Look for clauses that could suggest you are under the control or direction of the client, such as those listed above. Try to negotiate changes to these clauses if they are inconsistent with a business-to-business contractual relationship.
Provide evidence of autonomy
Provide evidence that you have control over how you carry out your work. For example, you can show that you have the ability to decide when and where you work, that you are free to choose your own tools and equipment, and that you have the freedom to decide how to complete your work.
Get a professional opinion
If you are unsure about the IR35 status of a contract, you may want to seek professional advice from a tax specialist. They can help you review your contract and working arrangements to maximise your chances of remaining IR35 free.
Significant legal cases where control has been an important element
Several significant IR35 cases in the UK in recent years demonstrate the importance of control in determining a worker’s employment status.
Here are a few examples:
Dragonfly Consultancy Ltd v HMRC (2008)
In this case, a software consultant working through a personal service company was found to be inside IR35 because he was subject to significant control from his client, the AA.
The client had the power to direct the consultant’s work and could terminate the contract without notice, which indicated an employment relationship.
It was accepted that control over the how in the case of a skilled man is not determinative, however the regular appraisals and monitoring of Mr Bessell went beyond what would be expected of a self employed individual genuinely in business on own account.
Some of the contractor’s later contracts had been amended specifically to remove clauses which might demonstrate control. Ironically, this was found to be evidence of IR35 avoidance in itself!
Autoclenz Ltd v Belcher and Others (2011)
In this case, the UK Supreme Court held that a group of car valeters who worked through a personal service company were actually employees for tax purposes.
The court found that the valeters were subject to significant control from the client, Autoclenz, in terms of how they carried out their work, which indicated an employment relationship.
Jensal Software Ltd v HMRC (2017)
In this case, a software developer working through a personal service company was found to be outside. The judge found that he was not subject to significant control from his client, the Department of Work and Pensions.
The client had no power to direct the developer’s work or monitor his performance, which indicated a self-employed relationship.
The judge said:
The level of control exercised did not go beyond that which was usual for an independent contractor. In balancing all of the factors I conclude that Mr Wells was not subject to the degree of control which would be necessary to constitute a contract of employment.
Christa Ackroyd Media Ltd v HMRC (2019)
In this case, a television presenter working through a personal service company was found to be inside IR35 because she was subject to significant control from the BBC, her client.
The BBC had the power to dictate how the presenter carried out her work and had a right of control over her activities, which indicated a client-employee relationship existed.
The Upper Tribunal found that the presenter’s editor would have control over any content produced due to the BBC’s natural responsibility over all output.
…it did not matter that Ms Ackroyd was not contractually bound by the Editorial Guidelines because both parties understood that the BBC could enforce those Guidelines if necessary.
